RISK ASSESSMENT

Activity sustained by private consumption

Growth is expected to significantly decrease in 2016. This fall is linked to the expected decline in public investment due to the fact that we are between two campaigns of European funding. This temporary decline in EU structural funding will also weigh on private investment, although SMEs (a vital component of the economy) will benefit, for the last year, from the Funding for Growth Scheme, which consists in making loans worth up to about 2% of GDP available at a maximum interest rate of 2.5%. At the same time, a new funding for growth scheme (FGS+) will take over to encourage the banks to lend to SMEs at market based rates by offering them various advantages, in particular a cut in the tax on their assets from 0.53 to 0.31% and partial management of interest rate risk. Household consumption should be the major contributor to growth. Employment should continue to grow, thanks, in particular, to increased hiring under the public employment scheme to which all the unemployed are required to belong in order to receive welfare benefits. Agriculture and public services are the major employers of this cheap workforce. Households will benefit from the cut in the flat income tax rate from 16% to 15%, higher welfare benefits and the lowering of VAT on certain products (new housing, pork products). Moreover, average wages should continue to increase more rapidly than prices, which should rise moderately. Because of Hungarian industry’s close involvement in the European production chain and of a recovery in demand, exports should remain dynamic. Sales of vehicles and automotive parts (5% of GDP) could, in addition, continue their progression.

Stabilization of public deficit at a moderate level, but still high debt

Despite the cost of converting household loans from the Swiss franc to the forint (less than 1% of GDP) and income tax cuts, the public accounts are expected to report a stable deficit of 2% in 2016. The State is relying on an increase in VAT income thanks to remote monitoring of cash registers and intends to privatise a large portion of the agricultural land it owns. The accumulation of previous budget deficits left a significant debt burden (75% of GDP at the end of 2015), but whose weight should start to ease. A third of the debt (against 50% end-2011) is denominated in euros and the share held by non-residents fell to 50%, because of incentives from the central bank to commercial banks and households to invest in forint-denominated Treasuries.

Comfortable trade surplus, but foreign investors are cautious

The current account surplus is expected to increase in 2016, helped by the recovery in Europe and still moderate energy bill. Thanks to vehicles and automotive parts, household electronics, household appliances, agrifood, medicines, medical devices, services to businesses and households (medical services, tourism), trade in goods and services has been reporting increased surpluses since 2009. Together with European funding and expatriate remittances, these surpluses make it possible to deal with the repatriation of income by foreign investors and investments by Hungarian households abroad. New foreign direct investments are no longer expected to decline and will post modest growth. The favourite sectors for FDIs, such as automotive, electronics and pharmaceuticals have mostly been spared from State interventionism. By contrast, telecommunications, energy, banking and media remain under pressure from the State, which has taken steps (taxes, price impositions....) in respect of large companies, generally foreign, which reduce their profitability and encourage them to disinvest in favour of public, as well as private Hungarian actors. Meanwhile, the external debt burden (excluding debt linked to FDIs) is declining (75% at end 2015 compared with 115% of GDP end 2011), mainly as a result of deleveraging by banks and businesses. The percentage held by the State and the central bank (58% of the total) is stable.

Viktor Orban and the Fidesz, a nationalist, centre right party, in partnership with the Christian Democratic People's Party were re-elected to govern in April 2014. Faced with electoral competition from Jobbik, an extreme right-wing party, which caused him to lose his two-thirds majority (needed to amend the constitution) during a by-election, Viktor Orban stressed his nationalist discourse, in particular towards refugees. This has maintained tensions with his European partners, already sharpened by Hungary's understanding attitude towards Russia over Ukraine and the institutional reforms which have hemmed in the mechanisms of checks and balances and freedoms. Despite State interventionism and a number of corruption scandals, the business climate remains satisfactory, worse than in Poland and Slovakia, but much better than in Romania and Bulgaria. The overall payment behavior is good.

Last update : June 2016

Payment

Bank transfers are the most common payment methods in Hungary. Based on current local rules companies have to pay almost all invoices by bank transfer. There are very strict rules for cash payments (maximum 1.500.000,00 HUF – cca. 5000 EUR – during one month).

Bills of exchange and cheques are not commonly used as their validity depends on compliance with several formal issuing requirements. These payment methods are not widely known and used.

Since July of 2012 a fast bank transfer been introduced in Hungary which means that domestic bank transfers made between 8am and 4pm are credited the same day. There is a transfer fee of 0,3%, maximum of 6000 HUF (approx. 20 EUR) applied.

Debt collection

As a general rule, clients should be advised to execute written contract and not just order/delivery forms. If possible, it is often advisable to execute, in addition to the main contract, any document which secures the creditor’s claim.

Where possible, it is advisable to avoid taking legal action locally due to the formalism legal procedures and rather lengthy court proceedings: it takes 1-2 years to obtain a writ of execution due to the lack of judges with adequate training in market economy practices and proper equipment. However, there are significant efforts to improve the efficiency of the courts.

Retention of title as a safeguarding measure is not used very often in Hungary. To be used to the advantage of any supplier it must be agreed upon prior to delivery. A Retention of Title clause has to be explicitly written into the contract and signed by both parties before any delivery.

The legal execution of Retention of Title is not really supported by the legal practice in Hungary. Where there is a liquidation procedure, any creditors with a Retention of Title guarantee have the possibility of being paid off before other creditors via delivery back of the goods.

Since 15 March 2014, interest is due from the day after the payment date stipulated in the commercial contract and, unless otherwise agreed by the parties, the applicable rate will be the base rate of the issuer in force on the first day of current half-year period, plus 8%.

It is advisable to seek an out-of-court settlement based on a payment schedule drawn up by a public notary, in case of default by the debtor, to go directly to the enforcement stage, subject to acknowledgement by the court of that document’s binding nature. The cost of payment schedule drawn up by a public notary approx. 1% of debt or contract amount and creditor have to advance the costs of the proceedings (approx. 300 – 500 EUR).

Holding a debt instrument due and payable (acknowledgement of debt, unpaid bill of exchange, dishonoured cheque, and so on), creditors may obtain an injunction to pay (fizetési meghagyás), using a pre-printed form. That speedier and less-costly summary procedure now allows the notary – if he considers the petition justified – to grant an injunction without hearing the defendant enjoining him to pay the principal and legal costs within fifteen days of serving the ruling (or within three days for an unpaid bill of exchange).

This type of legal action has become mandatory for all claims up to one million Hungarian forints (HUF) – about 3.400,00 EUR – and it can be taken by electronic form as of 1st June 2010.

Since 1st June 2010, the injunction to pay is carried out by public notaries in order to reduce the workload of the courts. Moreover, the Hungarian National Chamber of Public Notary introduced a computerized system to rapidly consider this sort of simplified application, the electronic order of payment being compulsory for legal entities whereas the paper file can still be used by individuals.

Although not mandatory, the presence of a lawyer is nonetheless advisable for this type of procedure. The advance on court fees, at the claimant's expense, amounts to three per cent of the total claim, but minimum 5.000,00 HUF, maximum 300.000,00 HUF (approx. 15 – 1000 EUR).

In case of objection by the debtor, the case is treated as a dispute and transferred to ordinary court proceedings. The parties will then be summoned to one or more hearings to plead their respective cases. The claimant has to pay additional court expenses of three per cent, but minimum 5.000,00 HUF, maximum 1.500.000,00 HUF (approx. 15 – 5000 EUR).

In Hungary the liquidation procedure will only begin if the debtor is insolvent and if the creditor or the liquidator requires the proceeding. A debtor is also entitled to ask for liquidation if he or she cannot or does not want to start a bankruptcy proceeding.

If the court decides for liquidation, a liquidator will be assigned. The liquidator will evaluate the financial situation of the debtor and the demands of the creditor and then dispose the distribution of assets and a balance sheet for the liquidation. Based on the liquidator’s reports, the court will rule over who will support the costs, how creditors will receive their demands, the liquidation of the bank accounts, the fulfillment of the liquidation and the termination of the company.

Creditors are required to report their claims to the liquidator within 40 days from publication of the liquidation order in the Companies Gazette. During liquidation, all creditors' claims are to be satisfied to the extent possible and in the order prescribed by the Bankruptcy Act. In the event a creditor fails to report its claim within the 40-day period, it may report the same to the liquidator within 180 days from publication of the liquidation order. The liquidator will automatically reject any claim reported after this 180-day period.

Upon reporting the claim, the creditor is required to pay a so-called "registration fee" to a specific bank account. The fee is currently set at 1% of the amount claimed and a maximum of HUF 200,000 (approx. EUR 700).